(3) Share-Based Compensation

We have various types of share-based compensation plans. Refer to our definitive proxy statement for our annual meeting of shareholders filed with the SEC on April 5, 2013, as well as Note 6 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, for additional information related to these share-based compensation plans.

We follow guidance contained in FASB ASC 718 to account for share-based compensation.

We receive a tax deduction for certain stock option exercises during the period the stock options are exercised, generally for the excess of the market value on the exercise date over the exercise price of the stock option awards. We receive an additional tax deduction when restricted stock awards vest at a higher value than the value used to recognize compensation expense at the date of grant. In accordance with guidance contained in FASB ASC 718, we are required to report excess tax benefits from the award of equity instruments as financing cash flows. For the three and six months ended June 30, 2013 and 2012, we did not recognize any material excess tax benefit or shortfall in earnings.

There were no stock option exercises for the six months ended June 30, 2013. Net cash proceeds from the exercise of stock options was $0.4 million for the six months ended June 30, 2012. The actual income tax benefit from stock option exercises was $0.2 million for the six months ended June 30, 2012.

Share-based compensation expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying condensed consolidated statements of operations, was $2.8 million and $3.3 million for the three months ended June 30, 2013 and 2012, respectively, and was $5.6 million and $6.7 million for the six months ended June 30, 2013 and 2012, respectively. Share-based compensation recorded in lease operating cost was $0.1 million for the three months ended June 30, 2013 and 2012 and was $0.2 million for six months ended June 30, 2013 and 2012. We also capitalized $1.6 million and $1.5 million of share-based compensation for the three months ended June 30, 2013 and 2012, respectively, and capitalized $3.2 million and $2.9 million for the six months ended June 30, 2013 and 2012, respectively. We view stock option awards and restricted stock awards with graded vesting as single awards with an expected life equal to the average expected life of component awards and amortize the awards on a straight-line basis over the life of the awards.

Stock Option Awards

We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards with the following weighted-average assumptions for stock option awards issued during the indicated periods:



	Six Months Ended June 30,
	2012
Dividend yield	0		%
Expected volatility	61.2		%
Risk-free interest rate	0.8		%
Expected life of stock option awards (in years)	4.3
Weighted-average grant-date fair value	$	15.71

During the first six months of 2013 we did not grant any stock option awards. The expected term for grants issued considers all relevant factors including historical and expected future employee exercise behavior. We have analyzed historical volatility, and based on an analysis of all relevant factors, we have used a 5.5 year look-back period to estimate expected volatility of our stock option grants.

At June 30, 2013, we had $1.5 million of unrecognized compensation cost related to stock option awards, which is expected to be recognized over a weighted-average period of one year. The following table represents stock option award activity for the six months ended June 30, 2013:



	Shares	Wtd. Avg. Exercise Price
Options outstanding, beginning of period	1,585,594	$	33.13
Options granted	—	$	—
Options canceled	(23,026)	$	44.90
Options exercised	—	$	—
Options outstanding, end of period	1,562,568	$	32.96
Options exercisable, end of period	1,276,225	$	32.44

Our stock option awards outstanding and exercisable at June 30, 2013 were out of the money and therefore had no aggregate intrinsic value. The weighted average contract life of stock option awards outstanding and exercisable at June 30, 2013 was 5.6 years and 4.9 years, respectively. There were no stock option exercises for the six months ended June 30, 2013 while the total intrinsic value of stock options exercised during the six months ended June 30, 2012 was $0.7 million.

Restricted Stock Awards

The plans, as described in Note 6 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unrecognized compensation cost related to these awards is expected to be expensed over the period the restrictions lapse (generally one to three years).

The compensation expense for these awards was determined based on the closing market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of June 30, 2013, we had unrecognized compensation expense of $17.6 million related to restricted stock awards which is expected to be recognized over a weighted-average period of 1.8 years. The grant date fair value of shares vested during the six months ended June 30, 2013 was $12.1 million.

The following table represents restricted stock award activity for the six months ended June 30, 2013:



	Shares		Wtd. Avg. Grant Price
Restricted shares outstanding, beginning of period	896,164		$	33.38
Restricted shares granted	630,930		$	15.36
Restricted shares canceled	(16,271	)	$	24.68
Restricted shares vested	(366,905	)	$	32.85
Restricted shares outstanding, end of period	1,143,918		$	23.74

Performance-Based Restricted Stock Units

In 2013, our executive compensation program was modified and, for the first time, performance-based restricted stock units were granted containing pre-determined market and performance conditions with a cliff vesting period of 3.1 years. We granted 189,700 of these units at a 100% of target payout while the conditions of the grants allow for a payout ranging between no payout and 200% of target.

The compensation expense for the market condition is based on a grant date valuation of $14.85 per unit using a Monte-Carlo simulation. The unrecognized compensation expense related to these shares is approximately $1.8 million as of June 30, 2013 and is expected to be recognized over the next 2.8 years. The performance condition is remeasured quarterly and compensation expense is recorded based on the closing market price of our stock on the date of grant ($15.47 per unit) per unit multiplied by the expected payout level. The payout level is calculated based on actual performance achieved during the performance period compared to a defined peer group. The unrecognized compensation expense related to these shares, based on the current estimated payout level achieved for the performance period, is approximately $0.7 million as of June 30, 2013 and is expected to be recognized over the next 2.8 years.